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International Compensation

Week 8

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International CompensationWeek 8

• EARLIER TODAY• Objectives for Int’l

Compensation– The Firm’s perspective– The Int’l Employees’

perspective

• Key Components of an Int’l Compensation program

• Two Approaches to Int’l comp ( + pros/cons):

– The Going Rate Approach– The Balance Sheet Approach

• Four special Problem Areas (taxation, COLA,TCN pay)

• Summary

What enables people to perform? ( & What Challenges do Expatriates face when interpretating performance expectations?)

What Challenges do Firms face in accurately appraising international performance?

What additional cultural/ logistical challenges arise in managing international performance?

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The Firm’s objectives for Int’l Compensation

• Consistent

• Competitive

• Cost-Effective facilitation of transfers

• Equitable

• Administratively manageable

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Int’l Employees’ Objectives for Int’l Compensation

• Financial protection

• Financial advancement

• Logistics

• Career advancement perks

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Key Components of an Int’l Compensation Program

• Base Salary• Foreign Service Inducement / Hardship Premium• Allowances

• COLA (Cost of living)• Housing• Home Leave Allowance• Education Allowance• Relocation Allowance• Spousal Assistance

• Benefits

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Approaches to Int’l compensation: The Going Rate Approach

(a/k/a the “Market Rate approach”; adapted from Text Table 6-1)

• Based on local market rates

• Relies on survey comparisons among:– Local nationals (HCNs)– Expatriates of same nationality– Expatriates of all nationalities

• Compensation based on the selected survey comparison

• Base pay and benefits may be supplemented by additional payments for low-pay countries

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Approaches to Int’l compensation: The Going Rate Approach (con’d)

(Advantages & Disadvantages, adapted from Text Table 6-2)

Advantages Disadvantages

• Equality with local nationals•Simplicity• Identification with host country•Equity amongst different nationalities

• Variation between assignments for same employee•Variation between expatriates of same nationality in different countries• Potential re-entry problems

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Approaches to Int’l compensation:

The Balance Sheet Approach• Popularity: Most common system in usage by MNCs• Basis: Home-country pay + benefits are the foundations of this

approach• Objective: Maintenance of home-country living standard +

financial inducement • Home package is adjusted to balance additional expenditure needed in

host country• Financial incentives (hardship/”expatriate” premium) are added to make

the package more attractive

• Main Categories of Outlays:1. Goods & Services

2. Housing

3. Income Taxes

4. Reserve

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Approaches to Int’l compensation: The Balance Sheet Approach (con’d)

Advantages Disadvantages

• Equity between foreign assignments for same employee•Equity between expatriates of same nationality in different countries• Repatriation is facilitated by the fact that expat compensation remains anchored to the parent-country compensation system• Simple to communicate

•Not necessarily equality amongst different nationalities – PCNs may get paid more than local nationals (HCNs) or TCNs (expats of different nationalities) for doing the same work•Not necessarily simple to administer• Unclear whether it promotes identification with home or host country

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Four Special Problem Areas

1. Taxation– Tax Equalization– Tax Protection

– Not-recommended Variations:» Ad-hoc» Laissez-faire

2. Pension & Other Benefits Issues

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Four Special Problem Areas (con’d)

3. Valid int’l living cost data (COLA) (vs. Cost of doing business)

4. Managing TCN compensation

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Points to Reflect On…1. What should be the objectives

of international compensation? How might pay norms/assumptions (about hierarchical pay structures vs egalitarianism, for example) influence objectives?

2. What would be the most important component of an int’l compensation system for YOU?

3. Which of the 2 approaches to int’l compensation makes more sense to you? Why?

4. If you were an expat, how would you like your employer to address the 4 special problem areas? And if you were the employer?